Sunday, February 27, 2011

US markets fell this week, as investors became concerned that the high oil price could slow economic growth. On Friday, the S&P 500 gained 13.78 points or 1.06% to 1,319.88, while the Dow rose 61.95 points or 0.51% to 12,130.45. For the week, the S&P 500 fell 1.7% to break a 3-week streak of gains, while the Dow dropped 2.1%.

Investors had taken the unrest in Egypt quite well. However, as the situation deteriorated in Libya, the price of Brent crude rose to US$119.79 on Thursday. This caused concern among investors, as they looked at past recessions caused by high oil prices. Meanwhile, Saudi Arabia has promised to increase oil production to offset the approximately 1 million barrels/day in production that has been lost in Libya.

US data mixed

On Friday, a Thomson Reuters/University of Michigan survey showed that US consumer confidence in February rose to 77.5, the highest level since September 2009. It was higher than the 75.5 the market expected, and higher than January's 74.2.

However, US economic growth in the 4th quarter of 2010 was revised down to 2.8% from 3.2%. It was lower than what economists expected.

Looking ahead to next week

The situation in Libyan could turn more positive next week, which would cause markets to bounce higher. However, it is more likely that the crisis in Libya has signalled the end of this rally. The fall in markets is this week could be the starting point of a correction. After all, the S&P 500 has rise 25.8% since September, making it overbought on all measures. A combination of tightening in China, an unresolved debt crisis in the euro zone, and turmoil in the Middle East will likely send markets lower from their current levels.

Monday, February 21, 2011

As fighting neared the Libyan capital of Tripoli today, gold surged past $1,400. Libya currently produces 1.8 million barrels of oil a day, accounting for 2% of total world production. The unrest is already causing oil fields to shut down.

The correction that gold experienced since the beginning of this year is clearly over. In January, gold corrected by 7%, and failed to head higher in the first 2 weeks of February. However, gold rose 3% last week and is continuing to rise.

Sunday, February 20, 2011

US markets headed higher this week, as investors put money into equity funds. On Friday, the Dow rose 73.11 points or 0.59% to 12,391.25, while the S&P 500 gained 2.58 points or 0.19% to 1,343.01. For the week, the S&P 500 and Dow both rose 1%.

According to Thomson Reuters Lipper, US$8 billion entered US equity funds in the week ending February 16. While many market watchers have been calling for a correction, the markets have continue to head higher, though volume has been falling in recent weeks.

China raises RRR

China announced a January CPI of 4.9% on Wednesday, lower than the 5% that economists expected. On Saturday, the Bank of China raised the reserve requirement ratio (RRR) of banks by 0.5%. It was only 10 days after the central bank raised interest rates, and it was the 8th increase in the RRR since the beginning of 2010. The new RRR for large banks will be 19.5%, effective Thursday.

Troubles continue in Europe

Early this week, UK's January CPI was reported at 4%, which is twice the country's target and 0.3% higher than December's 3.7%. With weak economic growth and high inflation, stagflation is a possibility for the UK.

The euro zone also reported 4th quarter 2010 GDP, with the region posting a growth of 0.3%. However, Greece's 4th quarter GDP decreased 1.4%, while Portugal's fell by 0.3%. On Friday, the yield on 5-year Portuguese government debt also hit a record high, since a bailout for Portugal is inevitable.

Gold and silver shine

After correcting 7% in January and not recording any gains earlier this month, gold has started to break out this week. Spot gold gained 3% this week, after recording 5 straight days of gains. On Friday, it reached a 5-week high of US$1,391.75.

Looking ahead to next week

With China announcing another increase in its RRR 10 days after its interest rate hike, commodities will certainly take a hit. Commodities have risen significantly since late August, so a strong effort by emerging markets to cool their economies can send prices into a correction.

Problems in the euro zone also have not gone away. While investors have shifted their attention away from the region since Portugal auctioned off 10-year bonds at 6.7% several weeks ago, leaders in the euro zone have not decided on a plan to solve their debt crisis.

Unrest is also aplenty in the Middle East, with mass protests in Bahrain, Iran and Libya. Thus, investors can expected markets to either head sideways or begin a correction this coming week.

Thursday, February 17, 2011

Even Jim Suva has turned bullish on RIM. The Citigroup analyst had been once of the most bearish analysts covering the stock. He has had a Sell rating on RIM since November 2009. Yesterday, he upgraded RIM from Sell to Buy, and increased his target price from US$55 to $80. As a result, the shares surged 4.2% in Toronto to close at C$67.25.

He cited Nokia's transition to WP 7, during which time carriers will be shifting their promotions away from the Finnish phonemaker to companies such as RIM. This is the same reason that I cited for RIM to head higher in a February 8 article. Juva dramatically increased his FY 2012 EPS estimate from $5.62 to $6.74.

Analysts turning bullish on RIM

Many other analysts have recently also recently turned more bullish on RIM. Morgan Stanley analyst Ehud Gelbrum, another one of the most bearish analysts, upgraded RIM from Underweight to Equal Weight on Feb. 4, while Credit Suisse analyst Kulbinder Garcha maintained a US$85 target price on Feb. 3.

RIMM is still a bargain

RIM was up another 2.1% today to close at C$68.66. Despite the rally in recent days, RIM is still trading at less at 10.5 times forward earnings. With continued growth of 20% plus in revenue and profits, the stock in a clear bargain compared to its peers.

I expect the stock to continue heading higher on analyst upgrades, and as we approach the launch of the PlayBook in March. I expect the stock to reach C$75 within 1 month, and C$90 within the next 12 months.

Wednesday, February 16, 2011

Shares of RIM rose 4.2% today to close at C$67.25 in Toronto. The sharp rise came after Citigroup analyst Jim Suva upgraded the shares from to Buy from Sell. He cited Nokia's transition period to using the Windows Phone 7 operating system, during which time carriers will shift their advertising to companies such as RIM. RIM can gain market share particularly in Europe.

Sunday, February 13, 2011

US markets rose on Friday after Egyptian President Hosni Mubarak stepped down. The S&P 500 rose 7.28 points or 0.55% to 1,329.15, while the Dow gained 43.97 points or 0.36% to 12,273.26. For the week, the S&P 500 was up 1.4%, while the Dow gained 1.5%.

Investors were relieved to see a resolution in the crisis in Egypt. The president also stepped down before things deteriorated further in a nation with the Suez Canal and oil pipelines.

Oil and gold weaken

With a resolution of the situation in Egypt, the price of oil and gold fell. NYMEX crude fell $1.15 or 1.33% on Friday to $85.58, its lowest level since November 30th. Meanwhile, gold futures fell $2.10 or 0.2% to $1,360.4/ounce.

China raises interest rates again

On Tuesday, China raised interest rates once again to cool the country's inflation. It was the third interest rate hike since tightening measures began in recent months. The 1-year savings rate was hiked by 25 bp to 3%, while the lending rate rose 25 bp to 6.06%.

Germany and France not getting support

Germany and France are pushing for other euro zone nations to adopt their proposed competitiveness pact. The agreement includes indexing wages and guarantees on debt limits. Germany has agreed to boost the EFSF (European Financial Stability Fund) if the other euro zone members accept the deal. However, other nations are opposing the changes that the agreement would bring.

Outlook for this week

With a 27% rally in the S&P 500 since late August, it appears that markets are running out of good news. The interest rate hike in China on Tuesday is the perfect example of the strong inflation occurring in emerging markets. Governments are trying desperately to clamp down on inflation, and the result will weaken economic growth. While the euro zone has been quiet in recent weeks, bad news could emerge from the region at any time. Thus, investors can expect markets to move sideways and lower this week.

Meanwhile, On Friday, Morgan Stanley analyst Ehud Gelblum upgraded RIMM from Underweight to Equal Weight. He sees the PlayBook adding $0.40 to EPS even with modest sales estimates of 2.1 million this year and 5.6 million next year. Gelblum sees RIMM benefiting from the Dalvik virtual machine. He also raised his device shipment, EPS and revenue estimates. FY 2012 EPS was raised from $6.29 to $7.23.

Nokia is RIMM's biggest competitior in international markets in Europe and Asia. Thus, with Nokia having to spend 12 to 18 moves to produce phones on Android or WP 7, RIMM would benefit by taking taking market share from Nokia.

With today's closing price of US$63.60, Garcha's FY 2012 EPS of $8.10 means that RIMM is currently trading at 7.85 times forward earnings. At a more reasonable 14 times multiple, RIMM's price would be at $113.4. RIMM shares are trading at 78.3% below that price, making the shares a clear bargain.

Sunday, February 6, 2011

US markets rallied this week, despite the continued crisis in Egypt. On Friday, the S&P 500 rose 3.77 points or 0.29% to 1,310.87, while the Dow gained 29.89 points or 0.25% to 12,092.15. For the week, the S&P 500 gained 2.7%, while the Dow ended up 2.3%. The S&P 500 and Dow reached 2.5-year-highs, while the Dow recorded a gain of 2.72% for January.

The rally in US markets was mostly due to positive US economic data. On Tuesday, the ISM reported that US manufacturing expanded in January at the fastest rate in 7 years. In addition, a rise in non-manufacturing activity and better-than-expected retail data were reported this week.

Investor sentiment also received a boost from Ben Bernanke this week, who cited gains in household spending and improved confidence. Positive earnings also provided a lift to markets, with companies like JDS Uniphase posting stellar results.

Employment data mixed

The US gained only 36,000 jobs in January, far fewer than expected. However, the unemployment rate fell to 9% from December's 9.4%, and was lower than the 9.5% that economists expected. The private sector added only 50,000 jobs, fewer than the 145,000 expected. Meanwhile, the manufacturing sector added 49,000 jobs, more than the 10,000 expected. Investors were unsure about what to make of the mixed data.

Copper gains 4.7%

The price of copper futures rose 0.8% to US$4.5795/pound on Friday. For the week, the price of copper was up 4.7% on a recovering global economy.

Oil rises on Egypt

Brent crude rose to above US$101/barrel on Monday for the first time since 2008. On Friday, it settled below $90 on news of possible stability in Egypt.

Gold gains

The price of gold weakened on Friday, due to a stronger US dollar and news from Egypt. For the week, gold posted its first weekly gain in 2011.

Outlook for next week

US markets posted its best week in 9 weeks despite the turmoil in Egypt. Technical analysts also see little resistance for markets to head higher. However, with US markets in overbought territory, and the turmoil in Egypt continuing, the downside potential is greater than upside potential in the coming week. In addition, energy, mining and agriculture sectors are in overbought territory, posing a large potential for a short-term pullback.